15% US Index

• PowerShares QQQ Trust, Series 1 ETF (NASDAQ:QQQQ)
• BlackRock Enhanced Capital and Income Fund (NYSE:CII)

15% Canadian Index

• CIBC Canadian Index (CIB300)

15% Emerging Market Index

• Claymore Canadian BRIC ETF (TSE:CBQ)
• Market Vectors Brazil Small Cap ETF (NYSE:BRF)
• Claymore/AlphaShares China Small Cap ETF (NYSE:HAO)

30% Fixed Income

• TD Canadian Bond Index (TDB966)
• iShares iBoxx High Yield Corporate Bonds ETF (NYSE:HYG)
• PowerShares Financial Preferred Portfolio ETF (NYSE:PGF)

5% REIT

• Vanguard REIT ETF (NYSE:VNQ)
• iShares Canadian S&P/TSX Capped REIT ETF (TSE:XRE)

Notes

• For the US index, we basically invest in Nasdaq-100 and S&P 500. We use a closed-end funds (CII) for S&P 500 because of its dividend. Check also our posting here for a couple of different closed-end funds that replicates S&P 500.
• Although Canada represents only 2% of the world GDP, we maintain a pretty high percentage of Canadian index. Why? It’s just because we live in Canada. Our “native” currency is Canadian dollar.
• We know that CIBC Canadian Index might not be the best mutual funds. However, we have to keep it this way until end of next year.

We would like to compare a couple of closed-end funds that track S&P 500, i.e.:

• BlackRock Enhanced Capital and Income Fund (NYSE:CII)
• Eaton Vance Tax-Managed Buy-Write Income (NYSE:ETB)
• Nuveen Core Equity Alpha Fund (NYSE:JCE)

All those three funds are basically buying stocks in S&P 500. They tried to outperform S&P 500 by writing options (covered call). That’s why; if you look at their fact sheets, they pay very high dividend. BlackRock’s Enhanced Capital and Income Fund, for example, pays 12.64% dividend. Yes, it’s double-digit dividend.

Now, let’s compare the performance of those funds to SPY, which is the biggest ETF that replicates S&P 500. As you can see, none of those funds can beat SPY in the long run. From year 2007 until today, here are the return of those funds:

• CII: –25.05%
• ETB: –22.37%
• JCE: –39.67%
• SPY: –21.44%

Of course, if you choose the right funds, the overall return including dividend might be higher than SPY.

Some experts have been recommending a couple of closed-end funds recently because of their high-yield dividend. See also recommendations from two speakers at Money Show Orlando 2010 here and here.

For those who are new to closed-end funds, here is the description from Investopedia.com.

A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.

Closed-end funds are usually designed to offer more income to investors, either by using leverage or covered call. Yes, you see the word leverage there; so it means more risks.

There are a couple of closed-funds company out there, such as BlackRock (also the issuer of the very popular iShares ETFs), Eaton Vance, Nuveen, ING, Alpine and many more.

Personally, we allocate a very small amount of money in closed-end funds. Why?

• The management fee of closed-end funds tends to be higher than ETFs. Worse, the fee information is sometimes not easy to find.
• Many closed-end funds are traded at very large premium or discount (more than 10% is quite normal). It is going to be tricky when we are about to buy or sell.
• Some closed-end funds are using too much leverage, which can be very risky.

If you want to invest in closed-end funds, do your own research or talk to your financial advisor. There are some good closed-end funds that may provide additional income in this kind of market. CEFConnect.com has a very good closed-end funds screener.

Links

• CEFConnect Fund Screener
• Favorite High Income Recommendations
• Stocks with More than 10% Dividend Yield

If you’ve been reading a couple of our last postings; you might be wondering: are we stock picker? We’ve been talking about stock picks, see here, here and here. In fact, we have never talked about ETF or mutual funds.

The answer to this question is: yes and no. We have a diversified portfolio; a large amount of them are invested, surprisingly, in ETFs and index mutual funds. We allocated only about 10% are invested in individual stocks. We’ll discuss more about our assets allocation in future posting.

Why don’t we just invest in index funds and do nothing? Isn’t investing in individual stocks very risky? There are a couple of reasons. One reason is because we want to find ten-bagger. We don’t normally find ten-bagger in index funds, do we? Another reason is because we want to improve our investment skills. We’re still beginner in the investment world; there are a lot of things we need to learn. That’s why; we don’t want to risk too much capital in individual stocks (for now).

(Picture is from stock.xchng.)